Monday, January 11, 2016

Amid Stock Market Panic, Dozens of Chinese Billionaires Are Mysteriously Disappearing

By John Vibes
Amid stock market panic in China, many of the country’s most prominent billionaires are disappearing without a trace. This week, Zhou Chengjian, the chairman of the clothing company Metersbonwe became the most recent wealthy Chinese businessperson to go missing. Metersbonwe said in a statement on Thursday that it would be suspending its shares on the Shenzhen Stock Exchange and that they were unaware of Chengjian’s whereabouts.
According to Bloomberg, as many as 36 companies reported executives missing from January to September.

Just a few weeks ago, Chang Xiaobing, the CEO of the state-owned telecoms giant China Telecom, resigned and then went missing. There were rumors that Xiaobing was taken by police or government agents in a widening corruption investigation that is touching every corner of the Chinese economy.
Back in November, Yim Fung, chairman and CEO of Guotai Junan International Holdings went missing, sending the company’s stock down 12%. Also in November, Chen Jun and Yan Jianlin, two senior executives of Citic Securities vanished without a trace.
In October, Zhang Yun, the president of the Agricultural Bank of China, also disappeared, however, it was reported that he was detained as a part of a corruption investigation.
Earlier this year, in June, Poon Ho Man, the CEO of China Aircraft Leasing Group went on vacation and never came back. He resigned while he was gone and has not been contacted since. Xu Jun, chairman of the department-store operator Ningbo Zhongbai is another Chinese executive who disappeared this year. It was confirmed by Xinhua news agency was being investigated for corruption at the time of his disappearance.
Dozens of other wealthy executives throughout China have disappeared in the past year, many of them under different circumstances. It is apparent that there is a growing corruption investigation in which many of these executives are implicated. However, only a small number of them have been officially announced as being in government custody. With that being the case, it is likely that some of the executives have fled and are in hiding expecting that they will soon be jailed. It is also possible that the government is sweeping them up in the middle of the night, as secret police in dictatorships have been known to do throughout history.
Also, it is unclear whether these corruption investigations are witch hunts, designed to place blame for the declining economy, or if it is a legitimate effort to keep bankers and executives accountable for their actions. There is no doubt that the government was involved in whatever corruption may have been taking place, but as always they are in charge of the investigation so it is unlikely that any government agents or employees will be implicated.
John Vibes is an author and researcher who organizes a number of large events including the Free Your Mind Conference. He also has a publishing company where he offers a censorship free platform for both fiction and non-fiction writers. You can contact him and stay connected to his work at his Facebook page. You can purchase his books, or get your own book published at his website

Middle East stocks continue to drop w/ Saudi’s Tadawul down >2% as investors spooked by China doom & depressed oil.

Middle East stocks continue to drop w/ Saudi's Tadawul down >2% as investors spooked by doom & depressed oil.

Goldman Sachs: Higher Ed Ripe for Disruption

A Goldman Sachs investment research report issued last month paints a very grim picture of the state of American higher education (h/t Bryan Alexander). The bottom line: “returns on a college education are falling,” and quickly.
According to a striking graph included in the report, the average “wage premium” from going to a four-year college (that is, the difference in incomes between college graduates and high school graduates) and college tuition (including room and board) rose in tandem throughout the 1990s. Then, starting in about 2002, something changed—the wage premium growth started growing more slowly, even as tuition kept rising as fast as ever.This disconnect, Goldman notes, is not a problem for all classes of colleges. It appears that the top institutions (as ranked by SAT scores) are still delivering good returns, while the returns for schools in the bottom half, and especially the bottom quarter, are falling off steeply. This can’t go on forever. If costs continue to exceed returns, the bubble will burst eventually—even if Washington keeps subsidizing it.Finally, Goldman summarizes possible avenues for a shakeup of the higher education system:
Two things in particular stand out as potentially disruptive to universities. First if employers changed their attitude toward nontraditional sources of degree awards. Massive open online courses (MOOCs) are the most obvious threat (30% of undergraduates already take some classes on line), but it could also be companies creating their own de facto degrees. Udacity for example offers nanodegree programs where curricula are designed in partnership with companies like Google, AT&T, Facebook, Salesforce and Cloudera. Second, for a broader new system of signaling and talent identification, look again to the tech sector; an increasing numbers of companies are using GitHub (a software development tool used for writing, storing and collaborating on code) to view coders’ portfolios of work as a better talent indicator than their academic resume. Consulting firms EY and PWC have both said they will use their own testing systems for recruitment rather than relying on academic grades.
Both of these avenues should be pursued aggressively. We’ve written before that despite the protestations of academic insiders, MOOCs have real promise—not just as supplements to brick-and-mortar degree programs, but as viable alternatives for large numbers of students. And a “new system of signaling and talent identification” is sorely needed. A national exam system, in particular, would help level the playing field for students who didn’t want to attend an elite college, or couldn’t afford to.
The current American higher education regime is not working for a huge number of students, and, as this report suggests, those who continue to cling to the status quo are in denial. The system has to change, and it will.

This is What Happens after PE Firms Get Through with a Retailer

Wolf Richter,

At least, they didn’t blame China.

Thursday afterhours, the Container Store, former LBO queen and IPO hero with 77 stores around the country, reported third quarter “earnings” – in quotes because those “earnings” were a loss.
Consolidated net sales for the quarter ending November 30 rose 3.3% to $197.2 million. But cost of sales rose 5.3%. CEO Kip Tindell blamed their new “$75 free-shipping service.” It’s “driving sales” and is “absolutely a good thing, but of course it’s a headwind to gross margin,” he said. That’s how Amazon leaves its mark.
Selling, general, and administrative expenses jumped 8.6%. “Disappointing,” Tindell called it. CFO Jodi Taylor blamed the “complexity of our transformational TCS Closets initiative,” plus higher payroll, healthcare, and storage expenses. Stuff happens in real life.
Stock-based compensation, pre-opening costs, and depreciation and amortization also rose. So income from operations plunged 87% to $1.8 million. And after $4.2 million in interest expense and a tax benefit of $694,000, there was a net loss of $1.7 million. It brought the net loss for the nine months to $4.3 million.
The company had lost money in fiscal 2013 and 2014 and had made a little in fiscal 2015. All hopes are resting on fiscal 2016 as the big profit year. But the company had some more news:
It cut its sales projections for fiscal 2016 at the midpoint by about 2% to $785-$795 million. It slashed its earnings projections from 30-38 cents a share to 10-13 cents. It projected that sales at established stores – stores open at least 16 months, plus online sales – would fall 1% to 1.6% for the year, and 3% to 5% for the fourth quarter.
All heck broke loose. Before the announcement, shares had closed at a new low of $7.06. In afterhours trading, they got pummeled. And on today, shares crashed 41% to close at $4.21.
As so many debacles, this one too has a private equity angle.
The Container Store, founded in 1978, was acquired by PE firm Leonard Green in July 2007, at the peak of the LBO frenzy. In November 2013, the “IPO window” – that brief period when anything can be sold at ludicrous prices and then get pumped up even higher as exuberance and hype rule – was wide open. And it was time to unload. The IPO price was set at $18 per share. Overnight, Wall Street machinations doubled the price behind closed doors. The first trade took place at $36 per share. The company became the hero of Wall Street.
So forget the losses it had been cranking out.
The stock then soared to $47.07 in two months. But early 2014, the hot air began hissing out. Today it’s down 88% from when it first started trading and down 91% from its peak two months after its IPO. This is how IPOs function as wealth-transfer machines.
Tindell tried to do the best he could. During the earnings call (via Seeking Alpha), he talked about “a choppy retail environment and softer than planned November,” his euphemism for the Thanksgiving shopping debacle.
And the rest of the shopping season? “The start to the fourth quarter has also been more challenging, which we have reflected in our revised outlook,” he said – his euphemism for the Christmas shopping debacle.
After going through how they’ve been spending more than planned, and how “disappointing” those expenses were, Tindell then pointed to the future, not the immediate quarter whose projections he’d slashed, but the more distant future, when the “greatest impact” of their efforts would be felt,  namely “in 2016 and beyond.” In brick-and-mortar retail these days, the good times are always in the distant future.
The Container Store isn’t the only one. Other brick-and-mortar retailers are struggling, particularly those that have been bought out by PE firms that piled debt on these companies and paid themselves fat fees and special dividends. Now these retailers have trouble borrowing more money at reasonable costs. They’re junk-rated, and at the lower end of the spectrum, credit is drying up. Risks that everyone refused to see are suddenly getting priced in. They’re suffocating on interest costs. Some already ran out of liquidity last year and defaulted, and more will in 2016.
They’re facing a very tough retail environment. American consumers are strung-out. But for brick-and-mortar retailers, the problems are worse: sales have been shifting to the internet. And then there are the Millennials, the Holy Grail for retailers.
Millennials make up the largest age demographic, and their earnings power is increasing. But they’re smart and have ideas of their own and refuse to be roped in massively with the usual tricks and devices. Instead they’re inexplicably frugal when it comes to things like clothes. But they love to blow their money on experiences, such as restaurants and going places, and on their electronic lives, their smartphones, gadgets, broadband bills, and Netflix accounts. And they do much of their shopping online.
More and more brick-and-mortar retailers are now admitting that they haven’t figured out how to get the attention of these folks.
That’s the reality brick-and-mortar retailers face. PE firm Leonard Green was able to exit from the Container Store in time – a disaster for those who wittingly or unwittingly (in their retirement nest eggs) ended up with these misbegotten shares.
But many of the retailers are still owned by PE firms, such as Neiman Marcus, Albertsons, J. Crew Group, 99 Cents Only Stores, Bon-Ton Stores, Claire Stores, and a slew of others. Exits were planned and IPOs were lined up, but the stock market got the jitters, and the IPO window closed on them. For these over-indebted, junk-rated brick-and-mortar retailers, it’s going to get much tougher. Read…  Defaults and Restructuring Next for Retailers

UK Banking Industry – Most Unstable in G7 Implements Depositor Bail-in Scheme

UK_economyBy Graham Vanbergen
Back in September we published an article “Grand Theft Auto – UK and EU Bank Depositor Bail-In Regime Implemented” in which we described how banks throughout the EU would simply steal your deposits if any of them failed.
The first paragraph stated “Shares and stocks are tumbling around the world, with investors worried that the next global crisis has already begun. There is considerable uncertainty and nervousness amongst economists and trend forecasters. Government’s sooth jittery markets with misinformation in the hope that confidence does not evaporate and their legitimacy with it.”
On the first day of 2016 all banks located within the EU follow the ‘Anglosphere’ nations of Britain, America, Australia, New Zealand and Canada into an agreement, where the next bank failure and bail-in could cost depositors all their money.

Think it won’t happen. Six years after the last financial calamity caused by reckless bankers aided by negligent politicians in late 2014, one in five European banks failed basic stress tests that would see bankruptcy on the first hint of trouble. What did they need to get past that stress test? Twenty four thousand million euros.
One should not forget that the Bank of Cyprus passed its stress test with flying colours just before it crashed and burned. That bail-out and bail-in came in at €23 billion to the taxpayer but it also took 47.5% of depositors money over €100k as well.
Think it won’t happen to British Banks? This from the Financial Times:
The Bank of England’s stress tests of the banking sector have been attacked as “fatally flawed” for setting hurdles that are too easy to clear and giving false comfort about the safety of the financial system.
A report published by the Adam Smith Institute, a free market think-tank, calls for the BoE annual stress tests to be scrapped, arguing they are “worse than useless” because they disguise weakness in the UK banking system.
The BoE has said that banks will be required to meet a minimum 3 per cent leverage ratio to pass 2015 tests. If it had done so in 2014’s tests, half the banks would have failed: Lloyds Banking Group, Royal Bank of Scotland, the Co-op Bank and Santander UK.
An article in right-wing The Telegraph, opined – “Punishing the banking industry punishes the UK as a whole” where it postulates that in 2014 the banking industry contributed over £30bn to the treasury. What this article fails to say is that half of that tax paid was employee taxation, and only £1.6bn paid as corporation tax …. for the entire industry. Don’t forget that banks are still paying billions in fines, used to offset even more tax contributions.
Five of the biggest banking corporations in the world paid no tax on its UK operations, whilst many others paid very little, their contribution to an austerity ridden nation caused by their malicious and egregious abuses being next to nothing.
Labour MP, John Mann, said:
The tax receipts from these large financial institutions show what a charade their claim to pay their fair share has become. They rely on the taxpayer to underwrite their risk, yet they pay a minimal return back to the exchequer.
Since our article barely four months ago, the outlook for banking has got a lot worse and more risky.
Banks have returned to the same markets that caused the crash; interest-only mortgages, zero-percent credit cards and what they now term “credit impaired products” or sub-prime to you and me. Consumer credit reached pre-crisis levels last summer and shows no sign of abating. Mortgage providers are engaged in a ‘rate-war’ with nearly 200 providers requiring just 5% deposits.
In 2008, derivatives exposure bankrupted Lehman Brothers  in a $600 billion bankruptcy case that clocked in as the largest bankruptcy filing since the beginning of time.
What was it that toppled the almighty Lehman Brothers – the effects of contagion.

What The Charts Say: "US Stocks Are In Riskiest Position In Seven Years"

Via John Murphy,
MAJOR STOCK INDEXES ENTER CORRECTION TERRITORY... After suffering the worst start to a new year in history, the U.S. stock market has entered correction territory which is defined by a drop of 10% from its old high. The charts pretty much speak for themselves. All three major stock indexes fell to three month lows in heavy trading. The next downside target is the two lows formed in August and late September.

What the indexes do from there will determine whether the current downturn is just a correction or something more serious. Unfortunately, some portions of the market have already broken those support levels.
SMALL AND MIDCAPS BREAK SUPPORT... Relative weakness in small and midsize stocks gave early warnings in December that the yearend rally was mainly a large cap affair and too narrow to continue. That situation has gotten a lot worse since then. Charts 4 and 5 show the Russell 2000 Small Cap and the S&P 400 Mid Cap indexes falling below their 2015 lows. That puts them at the lowest level since October 2014.

That's another important test for them and the rest of the market. 
TRANSPORTS ENTER BEAR MARKET TERRITORY... Chart 6 shows the Dow Jones Transportation Average falling to the lowest level in two years. It has lost -25% from its late 2014 high which puts it into bear market territory. What's surprising is that the transports haven't gotten any help from plunging energy prices. That may carry bad news for Dow Theorists who link the direction of the transports with the Dow Industrials.

It may carry good news for the Dow Utilities, however, which are showing more resilience. Chart 7 shows the Dow Utilities holding up a lot better than everything else.

It was the only market sector to register a gain during the week. Its relative strength line (top of chart) is rising as well. Since utilities are considered bond proxies, their relative strength large reflects the recent rotation out of stocks and into bonds.
BOND/STOCK RATIO FAVORS BONDS... As usually happens when stocks fall, bond prices are rising. That's especially true of longer-dated Treasury bonds. The green line in Chart 8 is a ratio of the 7-10 Year Treasury Bond ishares divided by the S&P 500 SPDRs. The ratio spiked last August when stocks tumbled.

The ratio has spiked again to the highest level in three months. Bond prices are also benefitting from the deflationary impact from falling commodity prices. Two other assets attracting safe haven buying are gold and the Japanese yen. Some measures of foreign stocks (both developed and emerging) have already fallen to 52-week lows. That doesn't bode well for U.S. stocks which are now in the riskiest position since the bull market started seven years ago.

It Begins: FXCM Doubles Yuan Margins, Warns Of Market "Disruption And Highly Illiquid Conditions"

The last time FX brokers, still hurting from the Swiss National Bank's revaluation shocker from last January which forced brand names such as FXCM to seek an urgent bailout, scramble to hike margins was in late June just ahead of the Greek "event risk" weekend, when  numerous brokers either hiked margins on EUR positions or went to "close only" mode due to "uncertainty surrounding the Greek debt negotiations... that could lead to high volatility on the market."
So, barely one week into the new year, one which has seen the stock market suffer its worst ever first week of trading, some FX brokers are not taking chances, and in the aftermath of the aggressive plunge in the Yuan (one we warned about a month ago), have decided to minimize client stop-out risk by hiking margins.
Case in point, here is FXCM with a just released warning about upcoming "highly illiquid conditions" leading to a doubling in Yuan margins:
Dear Client,

We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.


Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at or close positions as needed.
Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB's de-pegging the firm suffered tremendous losses:
Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.
The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.
The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.

The Entire US Economy Is Now Signalling An Economic Collapse

December jobs soared according to the BLS, but when one looks closer at the data a person with multiple part-time jobs is counted multiple times to push the employment numbers up. Automakers are channel stuffing the dealers, wholesale to inventory ratio is signalling a depression. Retail stores report sales are absolutely horrible this year. The Baltic Dry Index continues to implode. The first 5 business days of this year have been a disaster for the economy and the stock market.

Alan Watts ~ Why Money Rules Your Life

China Goes Full Keynesian-tard: Demolishes Never-Used Just-Built Skyscraper

"Growth" meet "mal-investment boom-bust" In a perfect example of the smoke-and-mirror-ness of China's credit-fueled expansion, a 27-storey high-rise building which was completed on November 15th 2015 was just demolished, "having been left unused for too long."

As China People's Daily reports,
Directional blasting demolition of a high-rise building was completed successfully at 7 a.m. on November 15, 2015 in Xi'an, in northwestern China's Shaanxi province.

The building was 118 meters high (27 floors) with a total construction area of over 37000 square meters.

Having been left unused for too long, the building could not be brought back into use so local government decided to demolish it.

It is reported to be the highest building that has ever been demolished in China.
*  *  *
The silver-lining - now workers can clean up the mess, dig a bigger hole... and fill that in - all in the name of Keynesian "growth."

Gold In 2016: "Economic Power Is Shifting"

Submitted by Alasdair Macleod via,
Advance signs of a global slump in economic activity emerged in 2015.
Furthermore, the dollar's strength, coupled with widening credit spreads confirms a global tendency for dollar-denominated debt to contract. These developments typically precede an economic and financial crisis that could manifest itself in 2016, partially confirmed by the disappointing performance of equity markets. If so, demand for physical gold can be expected to escalate rapidly as a financial crisis unfolds.


Gold has now been in a bear market since September 2011. Major central banks in the advanced economies have implemented policies that have covertly suppressed the gold price, while they have overtly inflated asset prices. This has led to valuation extremes in all asset markets, including gold, that would never be seen in free markets backed with sound money. We can be certain that today's unprecedented build-up of price distortions will be corrected eventually by market forces, probably in the coming months. The commencement of a crisis has already been evidenced by the collapse in energy and industrial-commodity prices, causing major problems for nations and international companies with US dollar obligations and suddenly finding they lack the revenue to service them. The scale of commodity-related losses is not generally understood, but cannot be ignored for much longer.
The rapid expansion of central bank balance sheets since the Lehman crisis is the ultimate phase of a process that can be traced back to at least the 1980s. Starting in London, US and European banks at that time took control of securities markets. Since then, they have increasingly directed bank credit at the expansion of those securities markets, principally through the development of over-the-counter (OTC) derivatives, but also by dominating bond and equity markets, and regulated derivatives.
The expansion of bank credit aimed towards financial activities has had the triple effect of inflating financial assets, suppressing commodity prices below where they would otherwise be, and enhancing international demand for the US dollar as the main pricing currency. The result has been an unprecedented peace-time expansion of global debt, while confidence in the reserve currency has been maintained. However, there are indications that this period of expansion is now at an end. According to the Bank for International Settlements' statistical releases, the gross value of bank-held derivatives has been contracting since 2013. Notional amounts of outstanding OTC contracts peaked at end-2013 at $711 trillion, and by June 2015 had declined to $553 trillion.
This is an important point, because an unseen bubble at the heart of the financial system is deflating with unknown consequences. When bubbles deflate, and here we are talking about one in the hundreds of trillions, bad debts are usually exposed. Even though much of the reduction in outstanding OTC derivatives is due to consolidation of positions following the Frank Dodd Act, much of it is not.
When free markets reassert themselves, and they always do, the disruption promises to be substantial. We appear to be in the early stages of this event.

Dollar and European dangers

As noted above, the rising value of the dollar measured against commodities is a major problem. In the short-term the dollar is extremely over-bought against record levels of commodity short positions. Most notable is the dollar price of oil, with West Texas Intermediate having fallen from $105 in June 2013 to $32 today. While much of the fall can be attributed to lower demand from a slowing global economy, some of it is undoubtedly due to the strength of the dollar itself. Bad and potential bad debts, many commodity-related and denominated in dollars, are a global issue, and the US banks are trying to control their international loan exposure. Consequently, international borrowers with dollar-denominated debt are being forced to sell down local currencies to buy dollars in order to cover their dollar obligations. The problem has been aggravated further by speculators bidding up the dollar against these distressed buyers.
The dollar's overvaluation is also supported by the belief that the US economy is healthy and performing relatively well. With official unemployment down to 5%, demand for domestic credit, while patchy, is basically sound and growing at a moderate pace. However, nominal GDP growth is entirely due to monetary stimulus being not yet offset by lagging price inflation, and is not the well-founded economic recovery generally supposed. But for dollar bulls, the apparent strength of the US economy is another reason to believe the dollar will remain strong, given the prospect of a rising interest rate trend. There are considerable dangers to this bullish view for the dollar, not least the degree to which it is already discounted in current prices.
A second global problem is the financial and economic condition of the Eurozone. 2015 saw the Greek crisis deferred, but for 2016 we have the prospect of trouble from Spain and Portugal, with government debt as a percentage of GDP estimated at 100% and 130% respectively. In the Spanish general election in December an anti-austerity combination of the left-wing Podemas and PSOE political parties won 159 seats against the ruling party's 123. Negotiations are now underway, but it looks like an anti-austerity coalition will form the next government. Greece was difficult enough, but Spain is many times greater in terms of its economic impact and the amount of government debt involved. Also, Portugal, whose economy is about the same size as that of Greece, had its general election in October, and the ruling party lost its overall majority, suggesting that anti-austerity pressures will increase in Lisbon as well. And Greece has not gone away.
Greece in 2015 was the warm-up act for what's ahead in the Eurozone. Meanwhile, €3 trillion of government bonds in Europe now trade with negative yields, an unprecedented situation, which illustrates how overvalued European government bonds in general have become, particularly when taking into account the parlous condition of some major governments' finances. The Eurozone banks are also financially precarious, having an average Tier 1 capital ratio to tangible assets of 5.1%, dropping to 4.1% when off-balance sheet items are included. Furthermore, the netting off of credit default swaps permitted under new Basel Committee rules has allowed the banks to conceal their true loan risk. The combination of European banks gaming the system, average core balance sheet leverage (including off-balance sheet obligations) of 24:1, and their balance sheets laden with wildly overvalued government bonds, has the makings of a crisis in search of a trigger.
A European banking crisis could escalate very rapidly if and when it starts, and would be an event beyond the direct control of an alarmingly undercapitalised ECB. The initial effect might be to drive the dollar higher in the foreign exchanges, particularly against the euro, and instigate a further markdown of commodity prices, as markets try to discount the economic implications of a systemic problem in the Eurozone. If an event such as this occurs, it would be impossible to limit it to a single geographical area. The major central banks would be forced into a coordinated rescue programme, involving a major expansion of all their balance sheets, on top of the post-Lehman crisis expansion.
Once initial uncertainties are out of the way, the prospect of escalating systemic risk should be very positive for gold, which is the only certain hedge against these events. To determine the potential for the gold price, its current value should be assessed by looking at the long-run inflation of fiat dollars relative to the increase of above-ground gold stocks, and adjusting the dollar price of gold accordingly.

FMQ and gold

The fiat money quantity represents the total fiat money that has been produced by the US banking system. It includes fiat currency not in circulation, being mainly bank reserves sitting on the Fed's balance sheet. The chart below shows the monthly accumulation of US dollar FMQ since 1959.
gold 2016 1
Following the Lehman crisis, the dollar-price of gold fell initially before recovering and gaining all-time highs in September 2011. With the benefit of hindsight, we can surmise that the immediate effect of the Lehman crisis was to trigger a flight into the dollar, before it became evident that the Fed's actions aimed at stabilising the financial sector were succeeding at the expense of monetary inflation. This also provides an explanation as to why, in order to maintain confidence in the dollar, the gold price had to be subsequently suppressed. Judging by all the circumstantial evidence following the Cyprus crisis, the most notable suppression exercise was in April 2013, and close study of market actions and volumes reveals that other less dramatic price suppressions have from time to time also taken place.
Given this experience, it would be wrong to rule out another attempt by the western central banks to suppress the price of gold in the event of a crisis. However, it is becoming clear that they can only suppress the price through the paper markets, given the relative scarcity of physical bullion in western central bank vaults, and the reluctance of individual central banks to compromise their bullion holdings any further. These short-term uncertainties cannot be quantified, but we can have a clear idea as to gold's current true value, expressed in US dollars. This is the subject of our next chart.
gold 2016 2
The chart shows the price of gold deflated by both the increase in FMQ over the years and by the expansion of above-ground gold stocks, since the price was fixed at $35 in 1934 by President Roosevelt. Adjusted by these two factors, gold at end-December 2015 was priced at the equivalent of $3.25 in 1934 dollars, less than 10% of the 1934 price. The only occasion the adjusted price has been lower was in 1971, just months before the Nixon shock, when the Bretton Woods system finally collapsed. The adjusted price stood at $3.13 in March that year.
The next chart shows the same price adjustments applied to the gold price, this time from August 2008, when the Lehman crisis broke and the nominal gold price was $918.
gold 2016 3
The adjusted price, reflecting the expansion of both the FMQ and above-ground gold stocks, now stands at $402, a decline of 56% in real terms since Lehman.
On value considerations, we can therefore conclude the following:
• Gold is cheaper than it has ever been against the world's reserve currency, with the single exception of the time when it was so under-priced that the US Government was forced to scrap its peg at $35 and abandon the Bretton Woods Agreement.
• Compared with the situation at the time of the Lehman crisis, gold is significantly cheaper today, which is wholly at odds with the continuing systemic risk to fiat currencies from undercapitalised banks, unprepared for the prospect of markets normalising.
Many contemporary financial analysts would argue that gold is not relevant to these issues, because gold is no longer money. This line of reasoning ignores the fact that ordinary people in the west do not get this message and are accumulating gold coins and small bullion bars at increasing rates. And more importantly, economic power is shifting from countries where this Keynesian view is prevalent to countries where it is not. The next section looks at the geostrategic implications of the shift in the ownership and pricing of gold from west to east.

China, India and the rest of Asia

China and India, together with all the other countries in mainland Asia, have been draining the west's vaults of above-ground gold stocks for far longer than most people in western capital markets realise. China first delegated the management of gold policy to the Peoples Bank by regulations adopted in 1983, in a move that followed the post-Mao reforms of 1979/82. The intention behind these regulations was for the state to acquire substantial amounts of gold, to develop gold mining, and to control all processing and refining activities. At that time the west was doing its best to suppress gold in order to enhance the credibility of paper currencies, by releasing large quantities of vaulted bullion through leasing and outright sales. This is why the timing is important: it was an opportunity for China, with its one-billion plus population in the throes of rapid economic reform, to diversify growing foreign currency surpluses, in the same way as the Arab nations did earlier and contemporaneously between 1973-1990 following the oil price boom.
When China set up the Shanghai Gold Exchange in 2002 and encouraged its private sector to accumulate gold, the state had obviously acquired enough bullion for its own strategic purposes. We cannot know how much the state has actually accumulated, or indeed to what extent the gold she has mined has been taken into state ownership since, but the amount is likely to be very substantial. We do know that gross deliveries into public hands since 2002, satisfied mainly by imports from western vaults, exceed 11,000 tonnes to date. It is therefore quite possible that China and its citizens now have more gold than all the other central banks put together, given that some official gold is currently leased by western central banks and some has been secretly sold to suppress the price.
The monthly statements about China's gold reserve additions are therefore meaningless. However, Russia is now accumulating official reserves as well, and the Indian state is trying to acquire her citizen's gold by stealth, having been frozen out of the market through lack of supply. The bulk of Asia is, or will be, bound together through the Shanghai Cooperation Organisation, an economic partnership dominated by China and Russia, encompassing more than half the world's population, and which accepts physical gold as the ultimate form of money. And what clearly emerged in 2015 is that the dominant trade currency in this bloc will unquestionably be the Chinese yuan, the currency of the country that has now cornered the world's physical gold market.
The future for the world's money is rapidly developing, as will become increasingly apparent in 2016. The era of dollar supremacy is coming to an end, no doubt hastened by the Fed's ultimately destructive monetary policies. The threat to the dollar's primacy is also a threat to the other great paper currencies: the euro, the yen and sterling. Whether or not these fail before, with or after the dollar, is only a matter for timing. China must have foreseen this possible outcome, otherwise she would not have embarked on a policy of accumulating gold as long ago as 1983, invested substantial resources into gold mining and refining, actively encouraged her citizens to own it, and is today promoting use of her currency for global trade and the pricing of gold.
Western market observers seem to be unaware of how advanced China's currency policy is today. Instead, they expect a full-blown credit crisis, the result of the credit expansion of recent years being undermined by a rapidly slowing economy. Furthermore, they argue that Chinese labour costs have increased and require a much lower yuan exchange rate to become competitive again. Based on western-style macroeconomic analysis, they naturally conclude that China will require a substantial currency devaluation to contain these problems.
While it is a mistake to gloss over the considerable economic difficulties, this analysis is flawed on two counts. Firstly, the state owns the banks, so a credit crisis stops with the debtors. And secondly, under the thirteenth five-year plan, China is embarking on a redirection of economic resources from being the cheap manufacturer for the rest of the world to serving its growing middle class and developing trans-Asian infrastructure. China's unemployment rate is estimated to be about 5%, so workers employed on current production lines will need to be redeployed, if the state's economic strategy is to progress. A substantial devaluation is therefore counterproductive, though the central bank does move the yuan's peg against the dollar from time to time.
The purpose behind China's accumulation of gold can only be to eventually make the yuan a reliable store of value. China will need to see a higher gold price in yuan, probably at a time dictated by external events, which she will patiently await. This is why, having developed the Shanghai Gold Exchange into the world's most important physical gold market, China plans to price gold in yuan, with the objective that the yuan-gold peg will eventually supersede yuan-dollar peg.
We will surely end 2016 with a wider appreciation that the dollar is no longer king, and that the future for money lies in Asia, the yuan, and gold.


In the near-term, paper gold is extremely oversold, reflecting the expression of western establishment sentiment in the paper markets. Futures and forward markets are short of paper gold to an extraordinary degree. Whether or not this leaves open the possibility of further falls in the dollar price of gold in the next few months is a moot point. More importantly, on longer-term considerations, gold has not been this undervalued since the events leading to the collapse of the Bretton Woods agreement. If current events lead to a systemic crisis in western capital markets in 2016, which given the global slump in economic activity looks increasingly likely, a further expansion of central bank balance sheets on top of the post-Lehman expansion seems certain. If this happens, it is unlikely the purchasing power of the dollar and the other major currencies will remain at current levels. And if the dollar loses purchasing-power, price inflation will rise along with nominal interest rates, and a wider debt liquidation in western capital markets becomes a real possibility.
China and her SCO partners have taken steps to be protected from this outcome and have cornered the gold market. A wise person should take note and think seriously about the implications.
Enjoy 2016.

CBS2 Investigates: Experts Say Decaying Gas Lines Are A Ticking Time Bomb Below City Streets

NEW YORK (CBSNewYork) — From the city to the suburbs, thousands of miles of some of the country’s oldest and decaying gas mains lay just below the surface of our streets.
As CBS2’s Dick Brennan reported, experts said the consequences could be dangerous or devastating.
In the early 20th century, there were new roads, rails, and an underground system delivered gas to buildings around New York.
More than 100 years later the landscape has drastically changed — but some of those exact same mains are still delivering our gas today.
“That infrastructure is way past its service life, which is dangerous,” natural gas expert Mark McDonald said.
McDonald, who investigates gas explosions, said aging mains like the ones we have in the northeast are at greater risk for cracks and ultimately leaks.
He pointed to a string of accidents across the country, the largest of which happened in Northern California in 2010, it killed nine people and destroyed property.
“Her house was at the epicenter where the gas line exploded,” Kimberly Archie said.
Archie’s best friend’s home was destroyed in the blast.
Her friend’s loss inspired Archie, a documentary maker, to investigate and chronicle gas explosion cases.
“You can have a ticking time bomb under your house and you don’t even know it,” Archie said.
A Con Edison spokesperson told CBS2 that since 2014 the company has been replacing old mains at a rate of 65 miles per year, a number that is expected to increase to 100 miles in the future.
PSEG said it too has been prudently replacing old mains and will triple its rate of replacement to 510 miles this year.
Adam Forman with the non-profit group Center For Urban Future said the new lines have decreased leaks by 30 percent, but many neighborhoods may still be vulnerable.
“It’s the oldest parts, so northern Manhattan, the Bronx,” Forman said.
Both PSEG and Con Edison said they’re doing more to check for leaks.
“It essentially would involve having a specialized truck drive down city streets. It’s not a big ordeal, and it will identify gas leaks just by driving over the main,” McDonald said.
Con Ed said it increased these surveys from once a year to thirteen times a year. Critics said the number should be even higher.
You may also want to consider installing a gas detector in your home.

Signs Of Market Breakdown: China Stocks, US Margin Debt And Failure Of S&P 500 Support At 1990

China Matters

Over the past few days I have repeatedly heard the following statement:
“China isn’t that important as it is only 7% of the U.S. economy.”
While that may be a true statement in relation to the economy, it is a far different matter when it comes to the financial markets.
With financial markets so closely correlated, what happens in China has a direct and immediate impact on U.S. markets. Beginning in 2014, China financial markets went parabolic as investors levered up to speculate. This is not the first time this happened, and is a sharp reminder of why the perils of leverage should not be readily dismissed.
The problem is, as shown in the chart below, that what happens in China is not isolated just to China. As money flees those markets, it also rapidly exits the U.S. markets as fears of contagion spread.
While the Chinese government has injected liquidity, suspended trading in almost half of the listed equities and encouraged pension funds to buy securities, arrested short-sellers and “disappeared” corporate executives, these actions have done little to stem the decline as investors “panic sell” in a rush to safety.
That collapse, if history is any guide, is likely not done as yet which suggests that the financial rout in other markets are only just beginning.

Speaking Of Margin

Last year, margin debt in China reached $264 Billion. After adjusting for the size of the two markets, is about double that of the roughly $500 billion in margin debt in the U.S.
This difference in relative size was given as a prime example about how margin debt is not a problem for the U.S. This is incorrect, and just another example of the MSM’s willful blindness to the facts. The fact is that the relative size of margin debt in the past has not been a “safety net” that investors should rely on. As shown, the level of real (inflation-adjusted)margin debt as a percentage of real GDP has reached levels only witnessed at the peaks of the last two financial bubble peaks in the U.S.
The same is seen in the raw levels of margin debt with respect to the financial markets.
While no single indicator should be relied upon as a measure to manage a portfolio, it should be well understood by now that leverage is a “double-edged sword.” While rising margin debt levels provide the additional liquidity to drive stock prices higher on the way up, it also cuts just as deeply when prices fall.
China is clearly showing the consequences of the unwinding of leverage. Despite government actions to stem the decline, investors are finding ways to extract their capital back out of the market in fears of a repeat of the 2008 crash. It is a lesson that should be studied and learned, again, by investors today.
Just as the Federal Reserve encouraged investors to jump into the financial markets by providing liquidity and suppressing interest rates, China also encouraged their population to do the same. Instead of taking actions to control the rise, they (both the U.S. and China) encouraged it. The problem is that when the “bubble” pops – it becomes uncontrollable.
As investors, it is our job to analyze the data and understand the inter-relationships between various data points and our portfolios. While margin debt is but only one “breadcrumb” on the trail, when combined with declining momentum, excessive deviations from long-term means, and weak economic growth, a larger picture of overall “risk” begins to emerge.
Does this mean that investors should “panic sell” immediately and run into the safety of cash? No. However, it does suggest that investors should be much more cautious about portfolio allocations and the degree of risk being undertaken as it relates to long-term investors objectives.

Technical Supports Under Attack

Earlier this week, I discussed the importance for the market to hold support at 1990 on the S&P 500. That level is under critical attack this morning as the market slides over concerns of China.
“Importantly, the ongoing topping process continues in earnest. As shown in the two charts below, the current topping process is very akin to the processes witnessed at the previous two major market peaks in 2000 and 2007.
You can clearly see the topping process being made over the last 18 months in the market. Until, or unless, the market can break out of the current downward trend, the risk of lower asset prices remains elevated.”
More importantly, if we step back to a “weekly” view of the markets we get a better picture of the level of deterioration currently in progress. As shown in the chart below, not only have both lower sell signals been triggered by deterioration in price momentum, the short and long-term moving averages have now crossed.
Since the turn of the century, the two primary moving averages have only crossed three other times – at the peak of the markets in 2001 and early 2008, and in 2011. The difference in 2011 is that while the sharp decline in the prices due to the debt ceiling debate caused the moving averages to cross, the two lower sell signals were not triggered. This kept portfolios allocated more towards equities at that time.
The current topping process, as discussed on Tuesday, is more akin to that seen in 2000 and early 2008. With primary moving averages now crossed, sell signals in place and markets trading below supports, rallies in equities should be used to rebalance portfolios and reduce risk. 
While the markets are not “technically” in a “bear market” currently, it is important to remember that they weren’t in 2001 and early 2008 either.Waiting to make adjustments until after full recognition of the event doesn’t leave you many options.
Just some things to think about.
Lance Roberts
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In